Feds probe O&M on drug billings as fees are held

The White House anti-drug office has held back nearly a third of Ogilvy & Mather's labor and management fees for buying anti-drug ads amid allegations of fraudulent billing practices.

While saying it has "no evidence . . . whatsoever" that Ogilvy engaged in fraud, the White House Office of National Drug Control Policy last week agreed to turn Ogilvy's time sheets over to a House Government Affairs subcommittee examining the administration of the anti-drug advertising contract.

The drug office blasted Republicans for using "strong-arm tactics" and "bias" in attacking Ogilvy.

QUESTIONS FOR OGILVY

Meanwhile, the General Accounting Office last week agreed to a congressman's demand that it call Ogilvy New York President Bill Gray to ask if his ad agency fraudulently billed work for the ad campaign. U.S. Rep. Bob Barr (R., Ga.) made the demand of GAO near the end of a hearing of the subcommittee.

Mr. Gray issued a statement denying wrongdoing.

"It is the policy of Ogilvy to ensure that billing for services is both fair and appropriate," Mr. Gray's statement said. "We have charged ONDCP within the industry standard, and if we learn of any accounting problems, we will address them and make any necessary adjustments."

Ogilvy was hired in January 1999 to handle media buying for the anti-drug program, with annual spending of $145 million in paid ads. The drug office pays the agency about $25 million a year plus a $1.6 million fee.

WHISTLE-BLOWER

At the hearing last week of the criminal justice subcommittee, officials of the anti-drug office and GAO testified that in March a former Ogilvy supervisor on the anti-drug account made a whistle-blowing call on his former employer.

GAO officials identified the supervisor as Dan Merrick, a former Bates USA project director on the anti-drug account who moved to Ogilvy when the agency won the government contract, but later left the agency. An April 13 memo prepared by Richard Pleffner, the anti-drug office's project director, did not identify Mr. Merrick by name. But according to the memo, the whistle-blower reported that Mr. Gray held an office meeting in summer 1999 to complain about "the lack of revenue with this contract."

"This person alleged that time sheets were altered to increase the number of hours worked against the ONDCP contract, on the follow-up billings additional people were charged who had not worked on the contract during the billing period and account management personnel [who] managed five or six other accounts [charged] most of their time to this contract," Mr. Pleffner wrote. The memo also noted that while the allegation came from a disgruntled employee, it followed questions he had about O&M expenses.

QUESTIONS RAISED

A study done for the anti-drug office by Jane Twyon, president of Worldwide Media Directors, a compensation consultancy, had raised questions about Ogilvy's costs. Ms. Twyon compared Advertising Age's reports of average salaries and media fees at agencies to Ogilvy's charges. Based on that, she told the anti-drug office it could expect to save between $8.5 million and $14.5 million a year on the contract. The report claimed the anti-drug office was paying especially high fees for media planning, 238% above the industry average. Mr. Pleffner, who earlier had rejected some Ogilvy costs and withheld payment on others, moved to withhold more.

Officials of the anti-drug office said that since April, $13 million of O&M's bills have not been paid. The figure includes $4 million in media, $1.2 million in production costs and $7.8 million of the $23 million Ogilvy has billed for labor and fees since winning the contract.

Officials of the White House office last week repeatedly praised Ogilvy's work and said the withholding of money is little more than the normal give and take on a government contract that occurs with any supplier. They said the differences reflected a need for better documentation of expenses and confusion over which expenses the government would pay.

"Ogilvy had never worked for the federal government before. It could be an innocent thing," said Alan Levitt, director of the ad campaign for the anti-drug office. He said Ogilvy has saved the drug office millions of dollars on media buys.

LESS CHARITABLE

Republicans on the subcommittee were less charitable. They complained the GAO's Office of Special Investigations had heard similar fraud allegations about Ogilvy from other sources, and questioned why the anti-drug office had not audited Ogilvy's bills.

Subcommittee Chairman John L. Mica (R., Fla.) termed the charges "very serious allegations." He denied a suggestion in a letter from Barry McCaffrey, director of the White House office, that "the manner of inquiry seems to imply motives that may be biased rather than analytical."

"Our staff didn't sic anyone on anyone," said Rep. Mica, who defended the hearing as part of the committee's oversight responsibility. "If someone is ripping off the taxpayers, I want it pursued."

Rep. Barr was also critical. "If we sit back and let these things rock merrily along, billions of dollars will have been lost," he said. "There is evidence of false billing and here we are waiting around."

Subcommittee Democrats defended the office and questioned the need for hearings.

The hearings are "absolutely premature" said Rep. Patsy Mink (D., Hawaii). "It is said that the subcommittee hearing has to be called based on anonymous tips. At this point we should be commending the drug [office] staff for deciding to withhold $14 million."

OPEN CRITICISM

The Oct. 4 committee hearing followed unusually open criticism of both the committee and the GAO by the White House office. Officials of the anti-drug office said an unannounced visit to Ogilvy in New York by government investigators and a threat against a retired Ogilvy executive stepped out of bounds.

"They used strong-arm tactics," said Pancho Kinney, director of strategy for the anti-drug office. "They showed up at the home of a former Ogilvy executive who had taken medical retirement . . . and threatened that he might have a heart attack in front of a grand jury if he didn't talk."

The GAO's Office of Special Investigation denied that, but said it is pursuing an allegation of government fraud that, if proved true, could lead to criminal charges against Ogilvy.

"Our investigation was conducted totally professionally. There is absolutely nothing we did that we have to make excuses for," said Robert Hast, the GAO office's director. "We have not determined any fraud, but there are sufficient questions that we want to look at the books."